T4 Equity Finance

Question 1

Venture Capital

Answer 1

Equity investment in new private companies. Some new companies grow with aid of equity investment provided by wealthy investors (angel investors) however many adolescent companies raise capital from specialist venture-capital firms

Question 2

Venture capital firms

Answer 2

Pool funds from a variety of investors
Seek out promising start up companies
Finance the firms operation
Provide advice
Contacts valuable to the business
Help bring firms product to market

Question 3

Venture capital funds

Answer 3

Organised as a limited private partnership
Funds dispersed in stages after a certain level of success is achieved
Investment policy: accept high uncertainty if there is a small chance the company will become successful and identify failed investments early and accept the loss rather than trying to fix problems

Question 4

Venture capitalists cash in their investments in 2 ways

Answer 4

Ince established sell shares to larger firm or become public and sell stock. The success of venture capital market requires active stock exchange that specialises in trading shares of young firms e.g. Nasdaq

Question 5

IPO of stocks

Answer 5

Primary offering - new shares sold to raise additional cash
Secondary offering - existing shareholders cash in by selling part of their equity holdings

Question 6

Process of an IPO

Answer 6

Selection of an underwriter - firms that buy an issue of securities from a company and resell it to pubic also provide financial advice
Preparation of a registration statement - detailed document about firms history and existing situation and projects intended to be financed with funds raised
Publication of prospectus - summary of most important info from registration statement
Arrange road show - talk to investors to get idea of how much stock they wish to buy for how much
Book building - build a book of likely orders

Question 7

Costs involved with IPO

Answer 7

Spread - payment of underwriter - difference between price at which underwriter buys new issue & issue price at which it is offered to public
(offering price)
Administrative costs
Offering price usually less than true value of the issued securities so investors who buy get a bargain at expense of firms original shareholders this underpricing is a hidden cost (new stock has an issue price below the true value of the company’s share)

Question 8

Underpricing question

Answer 8

Question 9

Investors that buy IPO at a low issue price realise high returns over the following days. The price reaches and exceeds its true valuation. Excessive returns make specific share desirable. Enhances firms ability to raise further equity capital in future

Question 10

Reasons it may make sense to underprice new issues

Answer 10

Winners curse - if you apply for an issue and have no difficulty in getting all the shares you may get the impression you overpaid for them. This is why issuers underprice

Question 11

As company grows it makes issues of 2 kinds to raise funds

Answer 11

General cash/Public offer - sale of securities open to all investors by an already public company
Rights Issue - issue of securities offered first or only to current stockholders

Question 12

Right question

Answer 12

Question 13

Answer 13

Question 14